Financing floating oil storage in hopes of a price recovery

The waters between Singapore and Malaysia used to heave with wooden ships carrying exotic spices. Now the Straits of Malacca are filled with vessels carrying a very different sort of commodity.

Oil traders awaiting a recovery in crude are turning to floating storage after benchmark Brent prices more than halved over a span of two years, according to Morgan Stanley analysts led by Adam Longson.

Unlike previous oil storage trades, however, this one is unusual in that current oil prices and storage costs ought to make it unprofitable. Morgan Stanley estimates that the one-month Brent storage arbitrage currently produces a loss of $0.48 per barrel, while its six-month equivalent loses $6.11 per barrel.

That suggests “no incentive to store oil on ships,” the analysts write. “Yet, banks are seeing a sharp uptick in interest to finance storage charters. This storage is not happening for profit. Rather, the market is looking for places to store oil. To profit, traders need to hope for oil prices to rise enough to pay for the new debt incurred for this storage.”
...

Traders must be calculating that selling the oil in the current market would be more costly than the financing of the storage fees. They are in effect adding more risk to their portfolio in hopes of an improved market in the coming months. Some could argue that this arrangement is just another sign of market weakness.

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